FEATURE RELEASE
USDA Forest Service
Northeastern Area State and Private Forestry
180 Canfield St, Morgantown WV 26505
Phone: 304-285-1503; Fax: 304-285-1505
Web Site: http://www.na.fs.fed.us/

Release No. MFO-03-07
E-mail: rfitzhenry@fs.fed.us

Estate Planning—Maximize the Transfer of Assets To Your Heirs

You have title to land for one of several reasons—you may have purchased it, inherited it, or married someone that owned land. You have cared for your land and improved its productivity, or maybe you own several acres that simply provide a refuge for relaxation. Regardless of how much acreage you own or your purpose for owning it, you want to protect what is yours and pass it on to future generations.

Although you may have devoted time and resources to managing your land, you may have given little attention to the best way to transfer this land to your heirs. Transferring your land and other assets to others requires some work on your part to ensure that they go where you want. But careful planning can create an orderly process that will distribute your assets in the shortest amount of time and ensure that more of your assets go to those you choose rather than someone else.

Estate Planning

The estate planning process begins with thinking about what you have and where you want it to go. Talk with people to whom you want to transfer your assets to get an idea of their thoughts. “Developing an estate plan is important for establishing who gets your stuff when you die. Without a plan, probate procedures will determine where your stuff goes,” said University of Vermont Extension Forest Resource Specialist Thom McEvoy.

Your estate covers all of your assets. In addition to land, other assets include insurance policies, annuities, stock portfolios, bank accounts, bonds, CDs, and collectables, to name just a few. The importance of establishing an estate plan increases as the value and complexity of your assets increase.

After thinking about how you want to distribute your possessions, the next step is to find a qualified estate planner to develop an estate plan. A qualified planner may have a title such as Certified Financial Planner (CFP). Contact the Estate Planning Council to find the nearest CFP. A CFP will advise you regarding what legal forms would best fit your individual estate planning needs. They may also give you information about other steps to take to pay for the expenses your heirs may incur. In most cases, a CFP will also be able to recommend an attorney that specializes in preparing the two legal documents used for estate planning—wills and trusts.

Wills and trusts direct how you want your estate distributed. Both have distinct advantages and disadvantages to consider when deciding which best suits your situation.  Neither a will nor a trust can eliminate Federal or State estate taxes, but they can reduce the Federal estate tax and provide a means to pay the taxes incurred if they are set up properly.

If the land you own is near an area where development is occurring, you may want to have your land assessed for agricultural use every few years to document the value of the property. The IRS calculates estate taxes based on property values, which are determined by examining recent land sales in the vicinity of your land. If your property is adjacent to development, its assessed value and resulting estate taxes may be higher because of its development potential. If documentation exists that you regularly have the land assessed for agricultural use, the IRS will be more likely to make estate tax calculations using agricultural valuations rather than development valuations.

Wills

Wills are the most commonly used legal document to transfer an estate. “Wills are an expression of a person’s desires. They state who it is that you wish to receive assets,” said McEvoy. They are relatively inexpensive and generally cost several hundred dollars to prepare. However, all wills must go through probate and are available for public scrutiny. As part of the probate proceedings, the law requires that a notice of your death be published in newspapers. This means that anyone can read the notice and request to see the contents of the will. They can then make a claim by contesting the will, which can tie up the distribution of assets for years. In addition, a will does not have any method to alleviate the Federal estate tax burden.

While the cost of setting up a will is reasonable, the costs of executing a will can be considerable. The process of probating a will can include court fees, attorney fees, and executor fees. The process can also take anywhere from 9 months to 2 years to complete without litigation. During the probate period, no assets belong to your heirs. Your heirs may, however, have to file (and pay) income taxes for the estate in addition to estate taxes due during the probate period. Probate costs can be between 5 percent and 7 percent of the value of an estate.

Trusts
A trust is a legal document that creates a mechanism for you to transfer your assets to one or more beneficiaries. You act as guardian, or trustee, of the trust. A trust does not expire when you die; a successor trustee is appointed who has the legal authority to sign over the contents of the trust to the designated beneficiary.

The two most common types of trusts are the revocable or living trust, and the marital or A-B trust. Trusts avoid time delays by transferring assets out of your name into the name of the trust. A trust is beneficial if a sizable portion of your estate consists of real estate. Trusts can reduce estate and gift taxes and efficiently distribute assets held within the trust without the cost, delay, and publicity of probate. Some trusts may also offer greater asset protection from creditors and lawsuits.

Trusts require more work to set up properly than wills and cost several thousand dollars to prepare. A trust is also a taxable entity, and income derived from assets in the trust are taxed at the highest rate. A trust is not recommended if you are in the process of applying for Medicaid or if there is a strong possibility due to age or financial conditions you may need to apply for Medicaid in the next few years.

Maintaining Your Estate Plan

After you have developed an estate plan and have a will or trust drawn up, review it every year to make sure it is kept up to date. The will or trust should only require minor revisions unless you have major life changes or there is a shift in the tax code.

Additional Information

Gifting and additional life insurance are two other strategies you can use to transfer your estate’s assets or provide money to cover estate taxes.

You can gift land to your heirs. Deeding your land in pieces to someone else each year is a straightforward, but relatively costly, way to do this. You will need a qualified attorney to annually walk you through this process. You can give up to $12,000 in tax-free gifts every year; it may take several years to gift all your land depending on its fair market value and the number of recipients. Using a trust to gift land is more complicated. Gifting is not a recommended strategy if it would put your financial security at risk.

Purchasing additional insurance provides extra cash for your heirs to pay estate taxes and other costs. If you use a trust, the trust owns the policy and is the beneficiary. If you are not using a trust, the additional insurance is not subject to probate and will go directly to beneficiaries listed on the insurance policy.

More indepth information can be found in Estate Planning Opportunities and Strategies for Private Forest Landowners. This publication is available online at the National Timber Tax Web site at http://www.timbertax.org/estate/estate.asp.

The information presented here deals with the basics of estate planning to provide wealth protection and efficiently distribute your wealth to your immediate heirs. There are other methods available that establish a lasting protection for your land for future generations, including establishing an S-corporation, limited liability company (LLC), and family forest partnership. These methods are beyond the scope of the material presented here and will be addressed in another document.

Side Bar

Estate Tax Exemption—The estate tax exemption is a tax schedule passed by Congress. If the total value of your estate assets is less than the exemption amount, no estate tax is charged to your heirs. The estate tax rate is 46% of the value of all assets above the estate tax exemption limit. For example, if you die in 2009 and your estate is valued at $4.612 million, the estate tax exemption will be $3.5 million and your heirs will owe a 46% estate tax on $1.112 million, or $511,520.

In addition, many States also impose a tax of some type. The tax goes by different names depending on the State, and the specifics on how the tax is calculated vary. It is important to discuss State estate tax requirements with a qualified individual to fully understand the circumstances your heirs could face.

Gift Tax Exemption—You are allowed to give up to $12,000 in tax-free gifts every year to as many people as you wish. Your spouse may also do the same, which increases the value of tax-free gifts that couples can give to $24,000 annually. There is a maximum lifetime gift tax exemption of $1 million.